Online SME payday lenders are alive and well

By Neil Slonin

August 19, 2016 — 11.03am

COMMENT

Its often not until they have repaid the loan that cash-strapped, time-poor and financially inexperienced borrowers finally work out how much they have actually paid in fees and charges to some online lenders that could be more accurately described as payday lenders to SMEs.

The way forward will involve serious regulation of the online SME lending industry.

You need to have a very good business to make a profit when paying up to and even beyond 100 per cent, but this is what many unsuspecting SMEs find themselves up for.

As an example, a NSW-based wholesaler took a $20,000 loan for a period of eight months and agreed to pay it back at $161 per day for 171 days. The total amount repaid including fees was $27,531, representing an annual rate of 115 per cent.

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Perversely, the lenders charging the highest rates are able to grow their businesses the fastest. By charging higher rates, these lenders can afford to:

Lenders that have achieved rapid growth are seen as more credible, which attracts partners, investors, introducers, media as well as borrowers. Meanwhile those that charge more reasonable rates face the prospect of being left behind. These players tend to be smaller, newer and have lower profiles. They are professionally and financially committed and are passionate about the role they and the industry can play in helping small business owners achieve their goals.

The SME online lending market is already crowded with more than 25 operators all with similar websites offering quick and easy solutions to the financing needs of small business owners. But with some of the lenders it's not easy for a borrower to readily answer three simple yet critical questions:

<!--[if !supportLists]-->·<!--[endif]-->Is this the best product for my needs?

<!--[if !supportLists]-->·<!--[endif]-->How much is it really going to cost me?

<!--[if !supportLists]-->·<!--[endif]-->Could I get a better deal elsewhere?

The lenders we are talking about here are online balance sheet lenders that fund loans off their own balance sheet. This is not an issue with Peer to Peer platforms because here the rates paid by borrowers are largely determined by what third party investors are prepared to offer so P2P rates are much more transparent. Borrowers on P2P platforms just need to be sure they understand what fees they pay (up front and on-going) to the platform.

It seems some online lenders exhibit the same skewed priorities they criticise banks for – purporting to look after the little people but in reality looking after themselves at the expense of the little people. Yet poor bank behaviour is much more likely to be exposed because banks are highly regulated public companies whose actions are closely scrutinised by regulators, ratings agencies, analysts, the media, politicians and possibly also in the not too distant future by a royal commission. The same cannot be said for the online lending sector where unlisted, unscrutinised and largely unregulated relatively new businesses are all seeking to stake their claim in the huge SME borrowing space.

This is a nascent market and in time borrowers and introducers will become better informed about the merits of alternative offerings. So what could and should be done to safeguard the interests of SMEs? Should they be afforded similar protection as consumers or should we just allow market forces to shape the sector over time?

It's a balancing act but both regulators and industry participants should do more to safeguard the interests of borrowers and build the reputation of online lending as a reliable and trustworthy alternative source of SME finance. Borrowers would have more confidence regarding the total cost of borrowing if:<!--[endif]-->

<!--[if !supportLists]-->·<!--[endif]-->all the fees and charges imposed were presented on an Annualised Percentage Rate (APR) basis. APRs are not without limitations but they do enable borrowers to make apples with apples comparisons;

<!--[if !supportLists]-->·<!--[endif]-->lenders were required to use consistent terminology and plain language in all agreements.

Borrowers should also be informed of any payments made to brokers and introducers and any other arrangement with other parties that could compromise the ability of the lender to act in the best interests of the SME.

The way we are heading it's only a matter of time before a scandal takes place that triggers the intervention of bodies such as ASIC and the ACCC. Meanwhile, lenders themselves need to take responsibility for their industry's future. Progress has been slow to date notwithstanding the endeavours of some, one of whom described the process of getting the players to come together as "like herding cats".

Online lenders have an opportunity, indeed a responsibility, to improve SME financial literacy. Transparency is a word that is bandied around a lot but only quoting daily repayments, advertising rates that are only available to the very best quality borrowers or hand-cuffing borrowers with lock-in fees is the antithesis of transparent and responsible. Online lenders should also publish details of their loan book such as rates, size, credit quality, term, amount, defaults, enquiry and acceptance rates etc. Some are already doing this to varying degrees but it needs to become the norm not the exception.

The lack of transparency and regulation in the online SME lending market has allowed some high priced lenders to achieve impressive growth rates but at what cost to small business borrowers? In addition, their conduct exposes the entire sector to harm to its reputation. For online lending to become a trusted, permanent and significant alternative form of SME finance, borrowers need to be able to readily tell if the loan they are considering best suits their needs, what its true total cost is and whether they could get a materially better deal elsewhere.